Market and market failure

The economic value of a good or a service reflects the preference that society as a whole has for this good or service.

The economic price always determines the total economic value of a good or service

The economic price does not necessarily reflect the value of a good or service to society as a whole because markets might be imperfect or do not exist for a specific good or service

Case study 5 from the ELD Interim Report portrays deforestation in Costa Rica. In the past, privately owned forests were rapidly converted into more profitable agricultural land. Agricultural land is more profitable because the services derived from such land are marketable.

In this context, which of the following are non-marketed ecosystem services derived from forest land?

Watershed services

Biodiversity protection

Carbon fixation

Costs of pollution resulting from production may or may not be included in the total cost of production.

Which of the following pricing models describes an internalized externality?

Total cost of agricultural production for the farmer = Agricultural cost + Water pollution cost

Total cost of agricultural production for society = Agricultural cost + Water pollution cost

Total cost of agricultural production for the farmer = Agricultural cost

Externalities are negative if costs are imposed on a third party. However, the provision of a benefit free of charge is a positive externality.

Which of the following ventures might provide positive externalities?

Bee Keepers

Apple farmers

Canola farmers

Agricultural products are marketed goods; they are traded on the world market and have an assigned market price. However, the market price of an agricultural commodity does not necessarily reflect all costs of provision for society as a whole – we call this an externality. An externality in the price for an agricultural product is caused by a discrepancy between private (farmer) and social (society) costs or benefits.

From society’s point of view: Which of the following constitutes an externality in the provision of agricultural products?

Contamination of a nearby river through the use of fertilizers in agriculture

Groundwater contamination through the use of fertilizers in agriculture

Contamination of a pond on the farmers land through the use of fertilizers in agriculture